Debt limit deniers back in force — Top story: Yellen picked for Fed

DEBT LIMIT DENIERS BACK IN FORCE — POLITICO’s Ben White and Seung Min Kim: “Wall Street and the White House are warning that failure to raise the nation’s debt limit will result in an economic apocalypse. … But there is a hard-core group of Republicans in Congress who say it’s just not true. Yes, the debt limit deniers are back in force. You can spin all the scary tales of default you want and they won’t believe you. They say if the $16.7 trillion borrowing limit is not raised by Oct. 17, as Treasury demands, then the U.S. government will still collect more than enough cash each month to keep paying bondholders.

“And if Uncle Sam can’t pay Social Security recipients or anyone else while it forks over interest payments to the Chinese? ‘Tough luck,’ these people say. The nation spends too much as it is. Blocking a debt ceiling increase will provide the radical shock therapy the nation desperately needs to start living within its means.” ‘We have 10 times as much tax revenue as we’ve got annual interest on the debt obligations,’ Rep. Mo Brooks (R-Ala.) said in an interview, offering the key talking point of the debt limit denial caucus. ‘So if the president does not want us to default on our credit or obligations, we won’t.’

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A DEBATE TRANSFORMED — “The persistence of this point of view helps explain how raising the debt limit transformed over the last three years from a largely pro-forma exercise in grandstanding into a high-stakes game of political chicken with the fate of the global economy hanging in the balance. … ‘Spending a day highlighting the debt and the deficit in Congress as part of raising the debt ceiling is probably a healthy thing,’ said Tony Fratto, a consultant at Hamilton Place Strategies and a White House and Treasury official under President George W. Bush.

“‘But the moment you start talking seriously about not raising the debt limit it becomes dangerous. And a lot of members of Congress are now saying things that give evidence that they have no idea what they are talking about when it comes to the debt limit and the way government financing works.’”

THE YOHO-VIAN VIEW — Fratto was speaking about the most fervent believers in the debt ceiling denial caucus, including Rep. Ted Yoho (R-Fla.), who recently told The Washington Post that failure by the U.S. to raise the debt limit ‘would bring stability to world markets.’ Yoho’s view is belied by current action in the global markets: Stocks are dropping triple digits each day, volatility is rising and Treasury is already facing far higher borrowing costs on short-term debt.

“There is growing fear that investors could start pulling cash out of money market funds, which hold large amounts of short-term government debt, possibly freezing up credit markets the same way the collapse of Lehman Brothers did in 2009, leading to the worst financial crisis since the Great Depression."

THE BURR CONUNDRUM — Richard Burr, Republican senator from North Carolina, said this week that he was ‘not as concerned as the president is on the debt ceiling, because the only people buying our bonds right now is the Federal Reserve. So it’s like scaring ourselves.’ This statement ignores that nearly $6 trillion — almost half of outstanding debt held by the public — is owned by foreign governments, including $2.4 trillion by China and Japan alone. Both of those nations this week warned the United States against doing anything that would put these massive investments at risk.

"And it would not necessarily take a technical default on an outstanding bond for China, Japan or any other holder to start dumping Treasury securities over fear that so-called ‘prioritization’ of payments to bondholders and some others would eventually fail and the U.S. would default.

THE HOPEFUL VIEW – “The hopeful view among Washington insiders is that most of the deniers don’t really believe what they are saying but are trying to harden their negotiating position and get President Barack Obama to cave in and offer concessions in return for a debt limit hike. ‘Everything is a game in D.C.,’ said Mark Calabria of the Cato Institute. ‘And you grab what leverage you have. This is the only leverage they have. Are they playing a game of chicken? Yes but that’s the only way things get done.’” http://politi.co/1bYrwmJ

MORE PAIN IN MARKETS — Bloomberg: “Asian stocks fell on concern the U.S. political impasse over the debt limit may lead to a default and after the International Monetary Fund cut its global outlook. … The International Monetary Fund cut its global outlook for this year and next as capital outflows further weaken emerging markets, and warned that a U.S. government default could ‘seriously damage’ the world economy. Growth worldwide will be 2.9 percent this year and 3.6 percent next year, the IMF said, compared with July predictions of 3.1 percent for 2013 and 3.8 percent for next year. http://bloom.bg/GMKEJf

FIRST LOOK: MORE DEBT LIMIT DENIAL — Rep. David Schweikert (R-Ariz.) wrote a letter to Treasury Secretary Jack Lew arguing: “To say that the federal government would not have enough money incoming to the treasury to cover our debt expenses is irresponsible and disingenuous. … What if the United States could reach primary balance? By combining assets sales from Fannie and Freddie, mortgage back securities, spectrum, federal real property, and a sweeping of unobligated appropriations balances, it is conceivable that we could reach primary balance in FY2014.” http://1.usa.gov/1bG3osB

TOP STORY: YELLEN PICKED FOR FED — POLITICO’s Ben White: “President Barack Obama [today] will announce that he has selected Janet Yellen as his nominee to be the next chair of the Federal Reserve … bringing a remarkably noisy battle over the top job at the nation’s central bank to what should be a relatively quiet conclusion. The announcement, set for 3 p.m. at the White House, follows a tense public selection process that saw the president’s initial first choice, former Treasury Secretary Lawrence Summers, withdraw his name after fierce opposition from many Democrats. …

“Yellen, the current vice chair of the Fed, was long seen as a much safer choice for the president and she would be the first woman to lead the U.S. central bank. She is close to current Fed Chairman Ben Bernanke and is likely to draw far less Senate opposition than Summers would have. … Her confirmation, however, is not certain. Many Senate Republicans are likely to oppose Yellen over her support for the Fed’s massive stimulus program. … On Tuesday, Sen. Bob Corker (R-Tenn.), who sits on the Banking Committee, noted he opposed Yellen’s nomination for Fed vice chair in 2010 because of her views on monetary policy.”

UNIFORM DEM SUPPORT — “Yellen is likely to enjoy uniform support from Democrats, many of whom signed a letter over the summer urging the president to pass over Summers and make her the nominee. These Democrats argued that Summers was too close to Wall Street, did not support strong enough banking regulation and had difficulty working well with women. Supporters of Summers, including many senior White House officials, unsuccessfully tried to beat back these arguments.

“Liberal Democrats were clearly thrilled with the choice of Yellen. ‘Today is a historic moment for the Federal Reserve, for women everywhere, and for all of us who care about job creation,’ Sen. Sherrod Brown (D-Ohio), a Wall Street critic who spearheaded the letter pushing for Yellen’s nomination, said in a statement.

MARKETS SHOULD LIKE IT — “Yellen’s selection is likely to reassure stock market investors that stimulus will continue to flow for at least a while and that rate hikes remain at least a couple of years away. The selection should also calm the market more broadly as it reduces the likelihood of a protracted and ugly confirmation battle. ‘Bottom line, this is bullish for stocks and bonds,’ said James Paulsen of Wells Capital Management. The announcement comes as markets are dropping over concern that the current government shutdown will bleed into a debt ceiling crisis.” http://bit.ly/16wf3pE

DRUDGE OVERNIGHT HED: “YELLEN TO RUN THE WORLD”

BUSINESS INSIDER: Yellen “Set to Become Most Powerful Woman in American History”

FIRST LOOK: EXTRAORDINARY MEASURES ANALYSIS — American Action examined the extraordinary measures that Treasury has been using since May 19 and found: “The Treasury Department is operating under extraordinary measures for the longest stretch in observed history. The Debt Subject to Limit has been poised at just $25 million under the limit since May 19. Operating under extraordinary measures creates costs, but it pales in comparison to the costs imposed by poor fiscal policy and/or a potential default.” Full paper: http://bit.ly/15UoOzx

FIRST LOOK: JPM’S CEMBALEST ON IMPACT OF DEFAULT — In a new analysis going out this morning, Michael Cembalest of JPMorgan Asset Management argues: “Gallup data shows that Americans' confidence in the economy has deteriorated more in the past week than in any week since Lehman collapsed in 2008, and over time, business and consumer confidence surveys have very clear consequences for economic activity. …

“[A] federal debt default would rank as one of the more unprecedented economic and financial events in the country’s history. The ghosts of Lyndon Johnson and Everett Dirksen are rumbling around the Capitol building, wondering what has gone wrong. Neither of them would ever have let it come to this.” Full report: http://bit.ly/18PtjcA

** A big new tax on health insurance is coming on January 1, 2014. Congress should stop it before it hurts families, small businesses and seniors. http://healthinsurancetaxhurts.org/ **

NEW THIS A.M.: STAKES ARE HIGH IF U.S. DEFAULTS — According to new polling data out this morning from the Center for Audit Quality (learn more about it at 8:30 a.m. at an event hosted by your M.M. columnist): “Nearly seven in ten ‘main street’ investors had confidence in the U.S. capital markets and a record 79 percent had confidence in investing in U.S. publicly-traded companies just prior to the government shutdown . … The CAQ conducted a follow up ‘pulse’ survey to its annual investor survey to gain a fresh perspective on how a prolonged government shutdown or U.S. default would impact investor confidence. …

“The results, from a poll of 424 average U.S. investors, show that: Today investor confidence in U.S. capital markets is holding steady at 69 percent. … The longer the shutdown continues the more confidence will erode — if it lasts another week confidence recedes to 60 percent. … Most importantly, investor confidence would plummet to a record low of 39 percent if Congress fails to raise the debt ceiling and the U.S. were to default on its financial obligations.” Full results investor confidence survey: http://bit.ly/1a93kdX; Pulse survey: http://bit.ly/17UmfvV Event details: http://bit.ly/19wgmkV

PORTMAN MINDMELD — Portman’s proposal according to a person familiar with it “is not an opening offer since there is no time for partisan ping-ponging of offers. This is Rob trying to find middle ground. If this were an opening offer, then it would be a lot more aggressive. As of now, he is talking with his colleagues on both sides of the aisle to discuss a 4-part plan: Take the CR off the table by funding the government at the $986 billion spending level that both Democrats and Republicans agreed to in the Budget Control Act of 2011, and pass it so that this CR lasts for 1 year, with the sequester still in place to bring it down to the $967 level.

“Agree to approximately $600 billion in mandatory spending reductions that come directly from the president's own budget proposal he released in April 2013. Provide instructions to Senate Finance and House Ways & Means Committees to overhaul our complex and antiquated tax code that hurts businesses and individuals. Income verification for Obamacare subsidies like what Diane Black and Tom Coburn have proposed.”

THIS MORNING ON POLITICO PRO FINANCIAL SERVIES –

LATEST DEBT-CEILING DISAGREEMENT: EXACT DATE — Kevin Cirilli and Rachael Bade: “You can add one more disagreement to the pile of differences between the Obama administration and congressional Republicans when it comes to the debt ceiling: When Congress needs to raise the government’s borrowing limit. The Treasury Department is urging Congress to increase the debt limit by Oct. 17 — a date when the administration says it will run out of accounting maneuvers and will no longer be able to borrow money to pay the government’s bills.

“But congressional Republicans are seizing on recent estimates from analysts to question that date as they seek to create any wiggle room they can in the debt ceiling standoff. ‘Is that the real deadline? No,’ Sen. Bob Corker (R-Tenn.) said of Oct. 17, whipping out a paper print of PowerPoint slides suggesting the debt default could be later. ‘We’re trying to figure out when the real date is … I think the real date is around the first of November.’” http://politico.pro/15mpQC2

GOOD WEDNESDAY MORNING — Hope to see some of you at the CAQ Investor Confidence event this morning in DC. Tweet questions hashtagged #InvestorConfidence. As always, send your tips and comments: bwhite@politico.com; and follow on Twitter: @ morningmoneyben and @ POLITICOPro.

DRIVING THE DAY — Obama nominates Yellen at 3 p.m. … The president does a round of interviews with local TV anchors to put more pressure on House Republicans over the shutdown and the debt limit. … Treasury Secretary Jack Lew has IMF/World Bank-related meetings with African finance ministers and Israeli Finance Minister Yaier Lapid, along with other meetings. … Senate Banking has a hearing at 10:00 a.m. on housing reform. … FOMC minutes at 2:00 p.m. expected to offer more details on debate leading up to the decision in September not to taper. …

BEWARE ROLLOVER RISK — Markets and the debt ceiling denial caucus may not be paying enough heed to the need for Treasury to regularly roll over existing debt. It could be a big problem starting Oct. 17. From Lew several weeks back: “At the same time, we are relying on investors from all over the world to continue to hold U.S. bonds. Every Thursday, we roll-over approximately $100 billion in U.S. bills. If U.S. bondholders decided that they wanted to be repaid rather than continuing to roll-over their investments, we could unexpectedly dissipate our entire cash balance.” http://1.usa.gov/16wgHYs

FIRST LOOK: NEW ADS TARGET GOP REPS OVER SHUTDOWN — Union group Americans United for Change says it is “launching TV ads in 10 swing GOP-held House districts putting the screws to vulnerable Members over the tea party government shutdown they’re enabling and its economic and health consequences for the middle class. It’s a significant buy, starting [today], going into next week. The goal: Inspiring more swing-district Republicans rightly worried about keeping their jobs to squeal to Boehner about bringing a clean CR to the floor for a vote before Independent voters turn on them all for good.” The ads differ district to district but look like this: http://bit.ly/1ctt4YS

MARKET ANXIETY GROWS — WSJ’s Michael Casey, Min Zeng and Chris Dieterich: “Signs of investor anxiety multiplied … as the U.S. government shutdown stretched into an eighth day and traders jockeyed to profit from wagers on a U.S. debt default. The rate the government pays to borrow for a month rose to its highest level in five years, following a $30 billion Treasury bill auction that Bank of America Merrill Lynch head of U.S. rates strategy research Priya Misra deemed ‘awful.’

“The cost of hedging for a year against a possible U.S. default via credit default swaps rose as much as 10 percent. The price of one-year U.S. CDS has risen 10-fold since Labor Day.

In the stock market, major indexes slid, with the Dow Jones Industrial Average marking its 11th drop in 14 trading sessions.” http://on.wsj.com/1ctw5sb

GOP FRUSTRATION GROWS — POLITICO’s Jake Sherman: “A reality is beginning to dawn on — and eat away at — many House Republicans: They aren’t at all sure of their party's strategy to re-open government and lift the debt ceiling. After forcing leadership to pick a fight it didn’t want to pick, sitting through hours of meetings with lots of internal hand-wringing and failing to force Democrats to negotiate, the path to avoid a prolonged government shutdown and the first debt default in American history is completely uncertain … Now, the party is flagging in polls one week into the first government shutdown in nearly two decades. And they’re just eight days ahead of the deadline set by the Treasury to lift the debt ceiling. …

“In the many legislative wrestling matches since Republicans took the House in 2011, there has always been the faint signs of an endgame. Either Obama would cut a deal with Speaker John Boehner or Senate Minority Leader Mitch McConnell (R-Ky.) would work something out with Vice President Joe Biden. … But this time, as Wall Street lights up the phones of rank-and-file House Republicans and public sentiment turns sharply against the party, things are stuck in neutral. It’s a dynamic that’s worrying senior Republican lawmakers and aides. …

WHAT’S UP BOEHNER’S SLEEVE? — “The White House and House Republicans are further apart than ever before. Obama said Boehner should open up the government and lift the debt ceiling and then the two parties could negotiate. Boehner called that an unconditional surrender.’ The comments elicited cheers from House Republicans, but at least a half-dozen GOP lawmakers told POLITICO that Congress is dangerously close to a default. Boehner, for the time being, is playing it cool. He has told Republicans in closed sessions and in conversations on the House floor that he has “something up his sleeve.; No one is sure what he’s talking about, and he hasn’t revealed his strategy. Several Republicans he is close with says he’s keeping his cards close to his chest. http://bit.ly/1bG6SeF

YELLEN FLY AROUND –

Cumberland Advisors David Kotok: “News reports of Janet Yellen’s forthcoming nomination will be greeted well by market agents. It should be. They will assume a continuation of the Bernanke policy. They will also assume gradualism when it comes to Fed tapering which is now likely to be delayed because of the budget, debt-limit fight’s damage to the US economy. … Yellen is highly skilled, seasoned and a veteran of the financial crisis. She certainly does not want another one to occur on her watch as chair of the Federal Reserve.

House Financial Services Chairman Jeb Hensarling: “I congratulate Dr. Yellen on her nomination. It is my hope that, if confirmed, she will lead the Federal Reserve to adopt a more transparent and rules-based monetary policy that aims for price stability and long-term growth.”

“As the Fed's vice chairwoman since 2010, Ms. Yellen, 67 years old, has been at the forefront of pushing the Fed to use new and risky policies to nurse the crisis-damaged economy back to health. These policies include buying trillions of dollars of bonds to hold down long-term rates in hopes of lowering unemployment. ... While the easy-money leaning aligns her with current Fed Chairman Ben Bernanke, it puts her at odds with a minority of Fed policy makers.

“They say the extraordinary policies have done little to help the economy and risk triggering higher inflation and financial instability. Her willingness to push boundaries to goose a listless economy reflects her intellectual heritage as a protégé of the late Nobel laureate James Tobin, a Yale University economist who advised presidents Kennedy and Johnson.” http://on.wsj.com/GFURaN

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Authors:

About The Author

Ben White is POLITICO Pro's chief economic correspondent and author of the “Morning Money” column covering the nexus of finance and public policy.

Prior to joining POLITICO in the fall of 2009, Mr. White served as a Wall Street reporter for the New York Times, where he shared a Society of Business Editors and Writers award for breaking news coverage of the financial crisis.

From 2005 to 2007, White was Wall Street correspondent and U.S. Banking Editor at the Financial Times.

White worked at the Washington Post for nine years before joining the FT. He served as national political researcher and research assistant to columnist David S. Broder and later as Wall Street correspondent.

White, a 1994 graduate of Kenyon College, has two sons and lives in New York City.